- ETH Merge date is anticipated for 15th September 2022
- The network is transitioning from a proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism
- The Merge is expected to reduce Ethereum's energy consumption by ~99.95%
- Customers do not need to take any action to participate in the Merge
- BTC Markets will monitor activity at the time of the Merge and evaluate any possible forks
"The Ethereum network move from proof-of-work to proof-of-stake consensus mechanism has been compared to changing a plane's engine mid-flight. It is hard to work in technology and not be thrilled by this audacious undertaking, so near completion"
- Caroline Bowler, CEO of BTC Markets
After years of planning and development, the Ethereum Mainnet is anticipated to migrate from its existing PoW consensus mechanism to its new PoS validation structure on 15th September 2022. The Merge, announced by Ethereum.org, will improve the scalability and sustainability of the Ethereum network. In this article, we will explore some of the basic concepts of Ethereum, the significance of this Merge, and the impact it may have on you as a holder of ETH.
What is Ethereum?
Ethereum is a programmable blockchain, which is a software platform that can be re-coded to build new uses for the technology. The network’s digital asset, Ether (ETH), is the second largest by market capitalisation.
Ethereum has a feature called smart contracts. A smart contract automatically executes the terms of an agreed contract, without the need for any third party. It is useful for many industries, including e-commerce, e-gaming, and financial services.
What is the Mainnet and PoW?
According to Ethereum.org, the “Mainnet is the primary public Ethereum (ETH) production blockchain, where actual-value transactions occur on the distributed ledger. When people and exchanges discuss ETH prices, they're talking about Mainnet ETH.”
The Mainnet currently operates on a PoW consensus mechanism that enables the Ethereum network to agree on things like the order of transactions or account balances. This avoids the possibility of double spending, and ensures that the Ethereum blockchain is very secure.
PoW relates to the underlying process that miners undertake to add valid blocks to the blockchain. As more blocks are added and the blockchain gets longer, the work gets harder. This means miners need to consume larger amounts of computing power to validate new blocks, which in turn is very energy intensive and not very sustainable.
What is the Beacon Chain and PoS?
The Beacon Chain is Ethereum's new PoS blockchain, and has been described by Coinmarketcap.com as the “spine that supports the entire Ethereum 2.0 system”. Like Mainnet, the Beacon Chain is the consensus mechanism of the network, responsible for creating new blocks, validating them, and rewarding validators with ETH for keeping the network secure.
It was deployed in December 2020 and has been running parallel to Ethereum’s Mainnet, confirming on-chain data, but through the PoS consensus mechanism. Running the chain separately, allowing for the identification of bugs or development issues prior to the Merge.
Being a PoS network, the Beacon Chain uses less energy than the PoW protocol (~99.95% less), as transactions and blocks can be approved quicker without the need to solve complex equations. Blocks on a PoS chain are said to be ‘forged’ as opposed to ‘mined’.
The Beacon Chain has been in operation for 19 months, testing its integrations through the various networks that Ethereum has deployed. Most recently they completed a Merge on the Goreli testnet on August 12th, 2022 - the largest of Ethereum’s test networks. This signalled the final hurdle before a Mainnet migration can occur, which is anticipated to take place on the 15th of September 2022.
What is The Merge?
Around 15th September 2022 (at TTD 58750000000000000000000), data held on the Mainnet (the existing PoW consensus protocol on Ethereum) will be merged with the Beacon Chain, and the new PoS consensus will become the engine for block production on Ethereum. After the Merge has successfully taken place, mining will no longer be the means of producing valid blocks on the network, and all future block validation will be processed through PoS.
No history is lost from the blockchain. As Mainnet gets merged with the Beacon Chain, so too will the entire transactional history of Ethereum.
What are the Benefits of PoS?
The move to a PoS consensus mechanism will provide the Ethereum network with heightened security, reduce energy consumption (by 99.95%* due to less computational power) and provide greater scalability opportunities not currently available under PoW e.g. sharding; a feature that makes data transfers and accessibility faster and more efficient for layer 2 rollups. Caroline Bowler stated, "The Merge is said to be the first of five major improvements to the Ethereum network. Vitalik Buterin is quoted as saying this will move the network from 40% to 55% completed".
PoS also allows ETH holders to earn crypto rewards through staking. Ethereum staking rewards are earned by setting up an individual node or delegating your ETH to a pool. By participating in staking, you assist in the validation of the Ethereum blockchain, further securing the network. The Ethereum network offers ETH as a reward for doing this.
Setting up your own pool requires 32 ETH, but if that’s not feasible, you can join a staking pool. More information on staking can be found on Ethereum.org.
Unfortunately, due to the Australian regulatory requirement to hold a managed investment scheme license, BTC Markets is not currently able to support pooled staking for any asset. We will continue to monitor the regulatory landscape while we investigate alternative earning opportunities for our customers.
Will the Merge Impact Ethereum Token Holders?
As a holder of Ethereum, there is nothing you need to do with your funds or wallet ahead of the Merge. There is no upgrade to an “ETH2” token, and any funds held before the Merge will still be accessible after it is complete.
It’s important to remain vigilant as scammers may attempt to target users unaware of how the Merge will be executed. Do not engage with notifications asking you to redeem, swap, or send ETH for “ETH2”, or any offers from others to act on your behalf to prepare you for the Merge.
There is some community speculation of a new Ethereum token due to a hard (contentious) fork following the Merge. BTC Markets will monitor activity at the time of the Merge and if a hard fork occurs, evaluate the impact on the network. To manage network risk, BTC Markets will suspend ETH and all ERC_20 token deposits and withdrawals a couple of hours before the Merge. This freeze will remain in place until the Merge is complete and the network is stable. We will keep our customers informed via our social media channels (Twitter and Facebook) during the event.
A small number of exchanges have listed ETHS and ETHW tokens as pre-emptive tokens in the event a hard fork occurs, and two chains emerge as viable. However, these pre-emptive tokens are not endorsed by the Ethereum Foundation.
Please always check reputable sources, such as Ethereum.org, for official releases and guidance.
What does the Industry Expect to Happen to Ethereum Post-Merge?
According to Nasdaq.com, Ethereum could become worthy of institutional investments and adoption post-Merge. The report suggests that crypto could go the way of futures and exchange-traded funds as companies look to diversify their holdings into the crypto landscape.
BTC Markets is excited about what the upcoming Merge will do for the Ethereum blockchain and the impact it will have on the broader crypto ecosystem.